Multinational enterprises' strategic responses to geopolitical tensions and sanctions

Abstract

Rising geopolitical tensions and concomitant sanctions significantly affect multinational enterprises’ (MNEs), yet the theory of MNEs’ strategic responses remains underdeveloped. Through a qualitative study using the Russia–Ukraine conflict as a natural experiment, we investigate how and why MNEs respond strategically to these complex conditions. MNEs recognize that these stigmatize the MNE subsidiary’s host country. Continued association with a stigmatized location leads to cross-border stigma translation risk that threatens the MNE’s network resources and non-location-bound firm-specific advantages (FSAs). While some MNEs divest to prevent cross-border stigma translation risk from tainting such resources and FSAs, others freeze operations or stay. Those who freeze operations mitigate cross-border stigma translation risk while preserving subsidiary resources to generate potential non-location-bound FSAs, labeled subsidiary-generated FSAs (SG-FSAs). We uncover two novel mechanisms enabling MNEs to stay while mitigating stigma risk: ‘downgrading non-location-bound FSAs’ achieved through resource transfer, isolation, and recombination processes, and ‘downgrading non-location-bound SG-FSA exploitation’ achieved by embedding SG-FSAs in products restricted to the host country. We develop a theoretical model of MNE responses to sanctions, explaining how MNEs manage cross-border stigma translation risks and why MNE strategic configurations drive MNE responses. Our study contributes to understanding how and why MNEs respond to sanctions from geopolitical tensions.